It’s not easy finding someone struggling because of the China trade war here at home.
A few privately held machine tool companies are having a hard time because of tariffs on steel and aluminum. It’s been well reported elsewhere. Soy farmers are worried that China won’t buy their beans. They’ll know more when the harvest starts in October about how they’ll redirect exports. Meanwhile, China is either dipping into its own supply or buying more expensive soybeans from Brazil. China is importing inflation at a time when their central bank is considering cutting interest rates.
On Wednesday, Trump upped the ante on his proposed $200 billion in more China tariffs. It was 10%; now the duty will be 25%. The market reacted by pushing the China A-shares lower. After a 4% slide on Wednesday, the XTrackers China A-Shares (ASHR) exchange-traded fund was down another 2.4% this morning.
Besides good corporate earnings and a generally solid global economy, Wall Street has other things to worry about besides trade tariffs. The Fed is one. The end of QE is another.
For most in the market, they see a healthy economy, especially as it relates to consumption. That holds true not only for the U.S. but also for China.
“You have rising income, rising labor participation, rising confidence, and all of that consumer spending accounts for two thirds of our GDP,” says Scott Clemons, chief investment strategist for Brown Brothers Harriman in New York. “Our starting position is much stronger than the Chinese because trade doesn’t matter as much to the American economy,” he says.
After Trump’s announcement that he was doubling proposed tariffs from 10% to 25%, the Fed saved China by standing pat on interest rates after market hours on Wednesday. All of that was erased Thursday morning as investors realized this trade war is still live. Photographer: Michael Nagle/Bloomberg
Why The Trade War Hasn’t Hurt The S&P 500
Assuming the worst-case scenario that the U.S. imposes tariffs on everything Made in China, China would have to be creative in how it retaliates. To date, it has retaliated with in-kind tariffs. The U.S. has around $50 billion of tariffed China goods, and China has the same amount. But exports are a much greater part of the Chinese economy than personal consumption. Only about 39% of China’s GDP is derived from consumers.
China learned a lesson in the Great Recession of 2008-2009. Xi Jinping realized that his economy was overreliant on exports, particularly those heading to the U.S. He said that model was unsustainable and quickly moved to promote China’s entrepreneurs, especially those involved in new technology. In a short time, the likes of Baidu and Tencent and Alibaba became Asian tech titans.
The U.S. is far ahead.
“The reason the U.S. stock market has been so insulated from the trade war is that the economy, to some degree, is protected from tariffs because of personal consumption,” he says.
China has been developing its consumer economy. And it has been slowly opening its market to foreign companies. Not too long ago, China allowed foreign financial services firms to set up shop in mainland China without a local partner. This is a gargantuan opportunity for American investment firms looking to tap the burgeoning A-shares market. China's A-shares are becoming part of the big emerging market indices. U.S. funds benchmarked to those indices will have to buy some of them. There is a need for equity analysis, bond analysts, and the usual array of buy and sell-siders.
In theory, China could close that door to Americans in retaliation for new tariffs. Trump’s trade team will decide on whether to move on the proposed $200 billion in new tariffs by September.
More At Stake
China and the U.S. were reportedly back at the negotiating table after weeks of apparent silence. The friendlier rhetoric between the U.S. and Europe might have put China on notice as the idea of working with the EU to put pressure on the U.S. seems to have failed, says Brett Ewing, chief market strategist for First Franklin in Tallahassee, Florida.
“On the U.S. side, one issue with everyone knowing tariffs and rhetoric are negotiating tactics is the fact that everyone realizes the will to leave them on is only as strong as the political strength the administration holds,” says Ewing. “We worry that the window to yield strength from the Trump side is narrow, and real agreements need to be getting struck soon.”
Trump has bipartisan support on the China front.
In China, Xi’s state-owned enterprises are in the crosshairs. The U.S. does not like the idea of forced joint ventures and tech transfers to state-run companies, especially those that compete with American companies in other markets.
The political will to keep this structure in place may push China to the negotiating table to offer concessions, as this is much more important to them than tariffs.
“The question will be whether Trump will accept reduced tariffs and a gradual change in the joint-venture rules in China for a PR win or if he will push for more real change that Xi cannot immediately give,” says Ewing.
China investors are losing money. The A-shares have been in a bear market since January. They got a bounce after market hours Wednesday thanks to the Fed keeping interest rates unchanged. All of that was erased this morning as investors woke up to the realization that the trade war is alive and kicking.
Meanwhile, U.S. investors are focused on the U.S. economy. The fundamentals are sound. Corporate earnings are not disappointing, except for Tesla’s yesterday. The economy may slow, but that is part of the economic cycle. Will there be a recession? Yes. A 10-year bull market cannot go on forever. But no one is forecasting a recession in 2019, nor in 2020.
“I think markets have learned that this administration negotiates more with sticks than carrots,” says Clemons.
Standard political protocol in the past was talk first, shoot later. Trump shoots first, then asks his opponent to talk.
“I think the midterm elections are an important date for the market,” Clemons says. “The White House wants some obvious victories in trade prior to November.”
